Finances plowed by farm life

Cramped in their 900-square-foot home in Madison, Wis., Camela Decaire and Chris Klaeser decided five years ago to keep their day jobs but to stake part of their future on a start-up niche: farming.

The couple bought a beef cattle farm, with a home, just 30 minutes from Madison in Barneveld, Wis., and turned it into Middlebury Hills, a community-supported agricultural business that sells produce, pesto and honey to members and at local farmers markets.

They broke even on this year's crops and expect to start turning a profit next year.

"It's our hobby and our passion," said Klaeser, 37. It's also a lifestyle. He and Decaire don't dream about amassing a fortune by retirement, but instead they yearn for a low-stress existence sustained by the fruits of their labor.

But that comes with some confusing questions.

Will they ever make enough in farming to sustain themselves and fund their retirement years without regular day jobs? Decaire, 36, works full time as an art director for a Madison-area publishing company, pulling in $60,833 annually. Chris, a carpenter, worked full time on the farm during this year's growing season but picks up odd jobs in the winter, adding nearly $14,000.

How should they prioritize their existing debts? They're trying to aggressively pay them down, but is that really the best idea if it puts them behind on their savings?

They also want to start a family - how would children impact their bottom line?

"We have the same financial goals as anyone, I imagine," Decaire wrote in a letter requesting a Money Makeover, "To get rid of credit and other debt, set aside savings, build for retirement and get a handle on what having a child will mean to us."

On top of everything else, there's pursuing their dream: the farm.

"While we've planned out the income level we need, it's an added uncertainty that makes us really want to get a handle on everything else," she said.

The couple met with Molly Balunek, a certified financial planner and director of financial planning for Spero-Smith Investment Advisers Inc. in Cleveland.

"Camela and Chris are trying to juggle a couple of competing goals," Balunek said, noting their negligible non-retirement-account savings and $212,429 in home and credit card debt.

Balunek at first set aside the couple's farm in assessing their finances, because it is no longer losing money but has yet to start adding to their bottom line.

Even without the farm, the couple has been spending more than they earn, relying on windfalls such as work bonuses to keep them afloat.

Where's it all going? Some has been spent to fix up the house, and they also enjoy good wine in addition to life's daily necessities.

They also owe $4,000 on a credit card with a 2.9 percent interest rate, $533 on another with an 8.25 percent rate and $24,296 on a home equity line they recently converted to an equity loan with a fixed 7.25 percent rate over 10 years.

Panicked by all that debt, the couple has been putting all available cash toward paying it down, rather than starting to build a savings account. That's a mistake, Balunek said.

She suggests slowing down the payments on the low-interest card to $900 per year rather than the $2,025 they're paying now.

"It is a very low interest rate, and that money, invested properly, is likely to work harder for you elsewhere," Balunek said.

Balunek also suggested slowing down prepayments on their mortgage and equity loan. Together, those steps would free up $2,100 per year in cash flow.

Take half of that money and begin building an emergency reserve savings account, with a goal of having at least $12,000 there, she said.

Put the other half of those savings toward retirement, she said, either in Decaire's 401(k) plan at work or in Klaeser's individual retirement account. That $1,050 per year could grow to $100,000 in 30 years if invested well, Balunek said.

Once the equity loan is paid off in 10 years, Balunek said redirecting that nearly $318 per month into retirement savings could generate an additional $156,000 for their nest egg.

Already, Decaire has accumulated about $91,000 in her retirement plan at work. If she keeps adding $12,922 per year in that account, including a company match, Balunek projected it will grow to $1.9 million in 30 years, at her retirement age, assuming an annual portfolio growth rate of 7 percent.

Adding on the redirected savings could boost that amount to roughly $2.2 million in 2036, Balunek said.

That sounds like a lot, but those are dollar figures factoring in an average of 3 percent inflation over the next three decades. By then, the couple's current living expenses should be about $135,000 a year, using future dollars.

To get that kind of income from their portfolio, they'll actually need an additional $500,000 in their nest egg, which means they need to be saving an extra $5,300 per year over what they're currently socking away.

Decaire should keep working, Balunek said, until the farm is generating sufficient money to allow them to put away enough cash to make up for the lost retirement plan and other savings each year.

Balunek also discouraged the couple from building the wrap-around porch in front of their home that they desire. Wait until the farm is contributing to the household bottom line, she recommended.

She also suggested a delay on buying a new computer system for the farm operations until they can pay for it out of net income from the farm.

As for a family, Balunek counseled the couple that their retirement savings should come before funding education, because they should be in a position to qualify for school loans and aid.

Finally, Balunek walked the couple through construction of their own investment policy statement, a document that declares their financial goals, risk tolerance and asset-allocation targets.

With that document, the couple can refer back to it annually to stay on track for reaching their goals, she said.

Although Balunek's analysis didn't green-light the idea of giving up the couple's non-farm income anytime soon, Decaire and Klaeser said the new debt-payment plan will help them live within their means and save for retirement.

"It was great to see the figures on how saving a little now will add up over time," Klaeser said.